The Anti-Environment Tax Rolls On: the State-Based Version

Commentary

The Anti-Environment Tax Rolls On: the State-Based Version

While there has been a great deal of focus on the federal Estate Tax in the past several years, including the tax’s negative impacts on wildlife and especially endangered species (as I discussed in a previous post, here), there has been relatively little attention paid to the likely detrimental environmental impacts of state estate taxes. Now, however, as detailed in an article by Tamara Cushing, Assistant Professor of Forest Economics, Management and Policy at Oregon State University, it is clear this needs to change.

After recent federal Estate Tax reform, which raised significantly the amount exempt from the tax, many landowners and others thought their problems were solved. Not so, according to Prof. Cushing:

“Lurking in the background, however, and receiving little attention from the forestry community, media, and even some tax advisors, was the lingering bogeyman of state estate tax laws (or state death taxes). Even after the federal estate tax burden was lifted for 2011 and beyond, a number of states retained – and still retain – more oppressive estate tax burdens.”

In 2012, Congress reformed the federal Estate Tax by making permanent the 2011 temporary exemption of $5 million per person of an estate’s value (or $10 million per couple), fixed the top tax rate at 40% (which prevented a possible return to the 55% rate that prevailed for much of the 1980s and 90s), included an adjustment for inflation, and added a portability provision (which allows the unused portion of a deceased spouse’s estate tax exemption to be transferred to the surviving spouse). Even so, a top rate of 40% is still very steep, to say nothing about the larger issue of whether there should even be a tax on inherited assets.

Due to the 2012 reforms, owners of large or valuable pieces of land, such as forest owners, felt a sense of relief. But there remains a big but relatively unnoticed problem, as Prof. Cushing points out:

“Many forest landowners have been under the belief that very few of them will have to worry about the estate tax with the federal exemption now set at over $5 million and adjusting for inflation each year. Programming efforts (mine included) have shifted to focus on succession planning rather than the traditional programs to explain how to minimize taxes on transfer at the time of death. Don’t fail to account for state death taxes just because you are below today’s federal estate tax exemption, especially if you live in a state with a death tax – or own land in one that does.”

The environmental tie-in for all of this is that estate taxes, whether federal or state, can force heirs of large or valuable pieces of land to subdivide the land and sell off pieces in order to pay federal and state estate taxes. When federal and state estate taxes are combined they can run in the range of 52-59% for the top rates and must be paid within one year of the owner’s death. Land tends to have higher environmental values, including for wildlife and endangered species, if it is in larger, more contiguous chunks. Habitat destruction and degradation, which occurs when land is fragmented, is the leading threat to all wildlife species, common and imperiled. For states like Washington, Oregon and Minnesota that have large amounts of valuable privately owned timber land, the combination of the federal and state estate taxes is especially problematic and very likely to lead to land fragmentation. The state estate tax rates and maximum exemptions for these states are: Washington, 10-19% estate tax rate and $2,012,000 exemption; Oregon, 10-16% and $1,000,000; Minnesota, 9-16% and $1,200,000.

Leading wildlife experts acknowledge the detrimental effects of the federal Estate Tax on the environment, and similar effects apply to state estate taxes, especially because the combination of the federal and state taxes can create a greater chance of land being fragmented. According to Michael Bean, when he was with the Environmental Defense Fund (and currently at the Interior Department), and the person widely acknowledged as the foremost expert on the Endangered Species Act and U.S. Wildlife law, the federal Estate Tax is:

“highly regressive in the sense that it encourages the destruction of ecologically important land in private ownership. In order to pay estate taxes, cash-poor inheritors of ranches, farms, and forests must often liquidate timber assets, subdivide the property, or otherwise destroy ecologically valuable land that had been cared for by owners who had truly loved it.”

The best solution to this problem is to eliminate the Estate Tax at the federal level and in the fourteen states where they still exist. Unless these taxes are eliminated, there will always be the threat that perpetually revenue hungry legislatures will seek to increase the tax rates and decrease the maximum exemptions, or seek to fiddle with estate taxes in other ways. Landowners need clear signals from government so they can plan better for the future. One clear signal they could receive, which would be an enormous benefit to American wildlife, would be the elimination of the federal and state estate taxes.